The NewBuy Guarantee scheme wasn’t quite the success the Government hoped it would be. The initiative enabled borrowers to receive a 95% loan-to-value mortgage on a new build property, helping first-time buyers to get on the property ladder.
Commercial lenders have now started to reintroduce 95% mortgage packages to their customers. But what are they and how do they work? And if you’ve received a payday loan can you still apply? CashLady tells you everything you need to know.
Am I eligible for a 95% mortgage?
As with any other type of mortgage, there are some important criteria you’ll have to meet in order to successfully secure a 95% mortgage. This includes:
Lenders will always perform a credit check on your borrowing history. The more issues you’ve experienced with paying back loans in the past, the less likely it is you will secure the mortgage. If you have taken out a payday loan, the lender will check the frequency and whether or not it was paid back on time.
Since the 2008 financial crash, the affordability test is now stricter than ever. Not only do lenders want to know how much you earn, but all of your outgoings and existing debt. To protect themselves further, they also want to know the likelihood of your financial situation changing for the worse, and how it would impact your ability to repay on time.
All of this will be documented and assessed by the lender. They will want to see proof you are financially secure as they are taking the bigger risk in lending the money to you.
How will a 95% mortgage benefit me?
The main benefit and the reason why a 95% mortgage is an attractive option to first-time buyers is you are only required to find 5% of the property’s value for the deposit. In most cases, the standard deposit required by lenders is anywhere between 10-20%.
What are the disadvantages of a 95% mortgage?
There are a few disadvantages to be aware of when looking at whether or not to apply for a 95% mortgage, such as:
Loan amount limits
Even if you have a high income and a good credit rating, some lenders may cap the amount you can borrow at no higher than £250,000.
Paying higher interest rates
In general terms, the more you loan, the higher the interest rates will be. As you might expect then, 95% mortgages tend to also have the highest interest rates.
Increased lending charges
Taking out a 95% mortgage means you have a high loan to value (LTV) which also means paying a higher lending charge (HLC). The HLC is used by the lender to secure a mortgage indemnity guarantee as insurance in the event they have to repossess the property and sell at a loss. However, not all lenders apply these fees, so always check beforehand.
Risk of negative equity
The property market is always changing, and if prices fall below the 5% of the property you have paid for, it could mean you actually own less than you paid for, or owe more money than the property is worth.
As you only own 5% of the property, it will take longer to lower your LTV to a level where you can secure a rate good enough that will enable you to remortgage.